Change of tax year

Reasons to Change the Tax Year

It may be necessary to change the tax year from the one that a business entity originally used when it was created. A good reason is that the nature of the business results in a great deal of transactional volume at the same time that the company is attempting to close its books for the year, which can be quite difficult to do. For example, many retailers prefer to have a fiscal year that terminates at the end of January, so that they will have processed all of the sales associated with the Christmas holiday and will now have minimal inventories left to count for their year ends.

How to Change the Tax Year

To apply to the IRS for a change in the tax year, use Form 1128, which is available online at the IRS Web site. The form requires you to itemize the current overall method of accounting (i.e., cash basisaccrual basis, or a hybrid method), and also to describe the general nature of the business. The IRS will also want to know if you have requested a change in the tax year at any time in the past three years, as well as the amount of the taxable gain or loss in those years, plus an estimate of the gain or loss during the short year that will be a byproduct of the changeover to a new year.

The form will also require information about the business organization’s relationship to any special types of organizations, such as a controlled foreign corporation, a passive foreign investment company, a foreign sales corporation, partnership, or S corporation, or if it is the beneficiary of an estate.

Also, attach a written explanation of the reason for the request to change the tax year. If this explanation is not included, then the request will automatically be denied. If the requesting organization is an “S” corporation or a partnership and already has a tax year that is not a fiscal year, then explain how permission for this change was obtained (since the IRS requires a calendar year for these entities, unless special permission has been granted). Finally, if a foreign-controlled corporation is requesting the change, then provide a complete list of all shareholders in it, as well as their addresses and ownership shares.

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Corporate Tax Planning